While On2 Technologies shareholders understand Google's intent and the implicit validation of On2's employees, products, and intellectual property (IP) portfolio, we are extremely disappointed in the offered price. The manner and timing by which recent material corporate developments have not been made public, especially in light of On2’s brightening prospects, as well as the long history of On2’s share price manipulation lead us to believe this deal is not fairly valuing On2 Technologies.
(PRWEB) November 20, 2009 -- Shareholders of On2 Technologies, from Holland, Germany, Finland and the United States have recently come together to form a large shareholder group in opposition to the proposed merger with Google. Today the group announced an open letter that was sent to the Google management team in Mountain View, California, in the hopes of initiating discussion on a more appropriate offer.
"Dear Mr. Schmidt and Mr. Pichai:
"A large independent group of 730 shareholders, over 54 million shares strong, have organized to oppose your $0.60 offer for On2 Technologies. As we approach the record date for shareholder voting on the proposed acquisition, we feel it necessary to address certain points with you directly regarding the value of your offer. Since announcing a definitive agreement to shareholders of your intent to acquire On2, you have made few comments to the press regarding the value of your offer or on Google’s broader M&A principles.
"You have noted that Google’s offer represents a 57% premium to the closing share price of On2’s stock on August 4, 2009. The On2 Technologies shareholders group believes that Google should respect broader principles of prudence and financial fairness in pursuing an active M&A strategy. We also believe that in this specific case your offer does not reflect the true value of On2’s intellectual property and business prospects nor does your offer reflect the premium to market value that you claim it does.
"On2 Shareholders fail to see any premium reflected in the $0.60 share exchange offer with respect to:
"On2’s Historic and Recent Trading Price: On2 traded near $4.00 in 2007 and at $0.65 as recently as May 14th. The $0.60 offer is not a premium over the price On2 achieved just weeks before the offer went public.
"Google's Demand of Exclusivity in Negotiations and 'No Shop' Provision: The demand of exclusivity in the negotiations and 'no shop' provisions in the merger agreement did not allow the opportunity to weigh the offer for fair market value. Shareholders believe the offer does not reflect fair market value let alone a premium as you claim.
"The Devalued Offer: The offer on August 5, 2009 valued the acquisition at $106.5 million in a stock-for-stock transaction. The $106.5 million valuation was based on each share of On2 common stock being converted into $0.60 worth of Google Class A common stock which was trading at $450 per share at the time of the offer. Today Google trades over $575 per share which effectively values the On2 offer at $83 million or $0.47 per share. The Google offer for On2 is now worth 22% less today than the day it was made.
"On2's Operational Performance: Since the August 5th offer, On2 has reported Q2 and Q3 results and minus acquisition related expenses, On2 would have seen a first time event of profitability in both quarters. Year over year revenue growth was 23.5% for 2008 and 2009 is on a run rate for revenue growth of over 17%. Shareholders fail to see any premium in the offer for a company whose very best days are still to come.
"Net Operating Loss Carry forwards: NOL carry forwards can become one of the largest assets on a company’s balance sheet. As On2 has matured and now grown the video business to profitability, they have incurred significant operating and tax losses along the way. While there will be IRS Section 382 limitations resulting from a potential change in ownership, Google would gain tax advantages of approximately $8 million a year. This benefit is certainly not reflected in the $0.60 offer to shareholders.
"On2's 'Embedded Solutions' Products and Device Pipeline: The growing royalty and revenue base is supported by dozens of licensing and partnership agreements signed over the last 24 months. The products and devices that grew out of these agreements are just now or will soon be entering the consumer market. Among these major customers and partners are Freescale, ARM, Atmel, Texas Instruments, MediaTek, Infineon, MIPS and still unannounced STMicroelectronics. A sampling of the device manufacturers using On2's embedded technology include Sony, Archos, Asus, Verismo Networks, Nokia, Samsung, HTC and Research in Motion. Shareholders firmly believe the offer does not properly value On2's growing pipeline of products and devices.
"World-Class Codec Technology VP8: The Form S-4 reveals Google's initial interest was in VP8 which later grew to all products. After months of extensive testing, the results were impressive enough that Google was no longer looking for a licensing agreement, but an agreement to purchase the entire company. The acquisition terms prohibited On2 from obtaining new VP8 customer relationships thus eliminating opportunities of new revenue from the world-class technology. Shareholders believe the offer does not approach the true value of the proprietary video technology and supporting software line of products.
"Google, given your conviction that video technology is essential to online and device platforms in your highly profitable, multi-billion dollar global advertising market, we believe the $0.60 per share offer undervalues On2 Technologies' advanced proprietary video technology platform. Taking into account On2's extensive patent portfolio, growth potential and the substantial scope for cost synergies with video in Gmail, Google Apps, Google Voice, YouTube and Android devices, we also believe that a higher, more appropriate price is not in conflict with Google's respect to the principles of prudence and financial fairness.
"Respectfully,
"On2 Technologies Shareholders Group
For more information, visit www.vote4on2.com
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